In the CAPM, asset i's equilibrium expected return is Ki = Rf + iM [RPM], where Rf is risk free rate of interest, iM is the systematic risk (beta) of the asset I relative to the market portfolio, and RPM is the market risk premium.

The factors are the market risk, measured as the S&P 500's returns in excess of a risk free rate, and credit risk, measured as the excess return of a synthetic bond portfolio with average Latin American country risk.

Abou Hend went on to explain that in the case of slow demand, which is a possibility, companies will decline this kind of assessment, especially as the risk free rate will jump from 25% to a range of 30%-32% for five-year term investments.

The two-factor models achieved according to the research carried out by Black, Jensen and Scholes states that a zero-beta portfolio with an predicted return, Rz surpasses the risk free rate of interest, Rf.

In defining a credit crunch we aim to distinguish 'normal' shifts in loan supply (due for instance to changes in the risk free rate from a monetary policy decision) from excessive contractions in credit.

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